Your report seems to be indicating that that 2017 will be remembered for this decade as a top for US equities. Are you sure, I mean this is a very tall claim? What you are telling your clients or what you are trying to tell is that US markets have topped out?

I believe that it has peaked out. The way we look at market is very different from others. Unlike most people who just focus on valuation, we look beyond valuations also. In fact, our Quant’s risk appetite index that we call Quant Known Risk Appetite Iindex has peaked out. It is at the highest point in two decades. We have data from 1995 till today. It is at one of the highest points and the steepest move which we have seen and that could one of the reason we are saying this could be a decade top and if I have to look at the liquidity parameter, liquidity peaked out in the month of January. Liquidity has started declining in last three months. Risk has peaked out, valuations are stretched. We look at an all three perspectives -- fundamental -- the aatma, liquidity the prana and sentiment the maya. From all three perspectives, US is in a euphoric phase which gives us confidence to take a call and this could be 2017 which will be remembered as a decade stop.

Last year also, we came out with a report and we talked about multi decade top for the bond market in US. That was somewhere in the month of July-August and that is a time bond markets were trading a negative yields for Japan and German markets. If you recollect, in the next 2.5 months’ time, the bond market in the US corrected 33%. That is a very big number. That is also a call which we made there also we talked about a multi-decade call. We think US interest rate will rally if not on an immediate basis, in the next five-six years time we can rally further and that will have a huge impact on the equity market. Ggiven the current behaviour perspective, it is a classic case of a textbook style top for us. This picture will become more visible down the line in next six or eight months. The climatic tops are visible in the rear mirror.

But how steep could the correction be for US equities?

So we are not talking about a meltdown sort of scenario. We think it has peaked out. We are talking about a smaller correction right now. If I have to look at the big picture perspective when I say we are more worried about Q2 and Q3 in US and Q3 particularly, we believe that can correct 15%, 20% and could lead to a corrective move in the emerging markets. That also may be 8%-10% sort of thing.

We have been very bullish on the emerging market. In January also we took a very bold call in emerging market and we talked about India outperformance okay it has played out well. We are still very bullish on emerging markets and in this report also we have said people should shift their money from US to emerging markets and in India in particular. So we are not bearish on India but on the relative basis, ultimately if US market is going to underperform, it has its own impact on a lag effect basis.

When the US market corrects sharply, we will also see some impact. So our call for the emerging market is that emerging market will continue to outperform the DMs but on absolute basis we worry about Q3. So may be the Q3 will be underperformance and on the relative basis on the absolute basis also.

The worry for us is that we also are at all time highs and since the world is working with one degree of separation, we are not decoupled and if US equities are going to correct 20%, we are bound to see some rub off. Will we outperform the rest of the region and wade through the storm or are we going to fall in line with the rest of the world?

Let me give you a perspective, exactly where we stand from the US point of view. Let’s look at the risk appetite. If in a scale of 10, the US is close to 8, India may be close to 3.5 or 4 maximum. Since risk appetite is still very low which clearly means that market has not peaked out from a risk appetite perspective.

Looking at liquidity from a scale of 10 US has peaked out from 9 and it is now close to 7 or so, whereas India is still closer to 4-4.5 and again has not peaked out. What is disturbing in India is valuation. Valuation in India is very stretched right now and that is a point of worry which lot of people are talking about.

But when we look at it as a combination we are not seeing any signs of euphoria in the Indian market so we could take a trading top call. Also, we are not too much concerned about India but I agree with you that when global markets will correct and consolidate, India will also have some impact but the overall India will remain a one of the biggest outperformer globally.

If you expect US markets to fall by 10 to 15%, is it time to go short on stocks there?

None of our parameters are showcasing that one should be aggressive short. May be small protection is okay but what is important right is the sector rotation. Sector rotation if somebody can do it properly that is a way to play out this market and that is we always talk about the 2017 till 2020 we will remember as a active strategy that buy and hold strategy will not work. It is all about active strategies so active strategies will play a bigger role in these sort of markets.

Let us talk about the India investor and people who are watching us right now. Is it time to reposition your portfolios, get out of small and midcaps which have given you phenomenal returns year to date and may be look at and stick buy with just quality large caps or do you think for some more time we can ride the wave when it comes to large and small caps or rather small caps and midcaps?

See nobody can time it so perfectly but given the sense that risk-off environment is knocking our doors with that background likely to restructure my portfolio, we will recommend the same thing to others also. We like to prune down high beta names, midcap names which has given a huge outperformance. Some sort of correction can happen. I am not bearish on midcaps and small caps but when risk off environment comes in, these stocks also can correct between 10% to 25%. It is all about restructuring your portfolio at these levels moving towards more defensive names, moving towards quality names will help.

Now do not go short. Markets will fall by 10%. What will lead the decline?

Our call for India is more worrisome on Q3. We are not even worried about Q2 which is unfolding. Globally, we have said that mid of Q2 that is 15th May onwards, risk off environment will start and India will also be affected with some amount of lag effect. That is the reason we are talking about Q3 being underweight for India and Q2 being equal weight.

Let us talk about the current positioning. If you expect the index to fall by 5% to 8%, what will happen to midcap stocks? Midcap is where the froth is. There are midcap stocks which are way above the mark. These are trading way above the intrinsic values. Could we have a situation of a 15% to 20% decline in midcap stocks and could it be even higher in metals, real estate, all the beta group which has gone up by 40-50% recently?

I agree with that because when we say that prune down high beta names because these stocks have outperformed significantly and when risk off environment comes, it is correct. Even I am more worried about base metal prices also because we have a view that base metal prices, commodities market will also correct and I will not use the word consolidate, definitely you can see a steep correction can happen.

When I say steep correction, 15% to 18% correction can happen in the base metals. So metal space is also something which is worrying me. If we look at the Hindustan Zinc which was the biggest outperformer last year and you look at last one month or one-and-a-half month performance it has been correcting. It gives you a leading sector or leading stock which was the biggest outperformer has started underperforming, so early signs of disturbance.

What should the positioning be now? In the current times, where would you take profit take out and where would you deploy fresh money when that dip comes?

I will look as a combination of approach. Let us talk about financials. Banking and financial was the biggest outperformer. If we get into risk off environment, if it is not deep correction, then banking sector can see some amount of pause at these levels and then look at the over ownership and under ownership. We are more constructive on SBI, ICICI Bank given the under-ownership, given the valuation and risk appetite all three things that are supporting.

Even we could be buyer in Axis Bank at lower levels. All other private sector banks, we like to recommend for booking profit whether you talk about Kotak or Indus or many other such names. Even HDFC Group. when risk off comes, these are the stocks where people have made extraordinary money. We would like to prune down these names. Some sort of forth has been witnessed in PSU banks and there was massive upmove in last one month’s time.

People have to build position and so we are worried about some of these PSU names who have not delivered result up to the extent that market was expecting. But there was good amount of hope which got built in. I expect some amount of PSU banks to be corrected. In some of the NBFCs which have been rallying a lot, you can see some amount of correction. I will like to prune down overownership when risk off environment comes, the biggest seller will be the FII side. I will be more concerned about FII related stocks. Domestic liquidity remains equally good. Anything which is overowned by FIIs, I have some sort of worry.

I am also wondering what do you do with the quality largecaps. Reliance has been a massive performer of the last lap of the rally. We have seen how bullish traders and investors are getting on L&T and the prospects of what L&T could deliver. The stock is already started moving. What do you do with these two legs of the last lap of the rally?

We have been very bullish on Reliance for last few quarters and I always call it the most hated stock of this hated bull run which is unfolding right now. Given the outperformance which we have seen, the stock moved up to Rs 1240-1250 levels or so. Since then it has corrected a bit. My view remains equally constructive on the stock because we still believe this is a grossly underowned stock.

Underownership itself will keep on holding the stock. We have seen that whenever Nifty has corrected, Reliance has outperformed. So in this risk off environment, Reliance should be overweight in our portfolio. We remain constructive on Reliance. Coming to cyclicals like Larsen or some of the infra names, if we get into risk off environment, then if people move from high beta name toward cyclicals, Larsen should get support.

I am not saying that Larsen is under owned in any manner as compared to Reliance, but given the shift which can happen, even some of the IT stocks have corrected a lot from these levels. As as a house we are still bearish on thi. But we are also making a stand that price wise damage is largely over and time wise correction is pending. You might see some money flow moving towards technology stocks because with this risk off environment coming in, rupee can also depreciate a bit.

We have a big call on appreciation. We talked about it in the beginning of the year also with 63 as a target. We have seen close to 63.90. So we are expecting may be one, one-and-a-half rupee depreciation can happen in Q3. With that background, technology stocks can get some support.

So if I have make a quick list of Sandeep Tandon or Quant Capital’s top recommendations for 2017, for the second half of 2017, give me one trade, one stock idea and one short idea.

2017 can be big list but what is relevant is right now how to position yourself in Q2 and Q3. If you look from 2017, I will say HDFC pack will be the biggest outperformer followed by Reliance but the key thing is that from the current level what you like.

So at current level within banking space, we like ICICI Bank and SBI. It is again looking from the near-term and the short-term opportunity which you are looking at. SBI may not be the biggest outperformer from the full year perspective but from Q2 and Q3 perspective, I like to build or revamp my portfolio.

So you are not giving me names, I was hoping for names?

You are talking about the entire year. For the entire year, calls will be very different than on immediate basis. On the entire year call, we remain constructive on banking, financial. We have been talking about 35,000 Bank Nifty but are we looking at on immediate basis? The answer is no. If you are looking on an immediate basis, these are not the stocks which I like but if you are looking at December end, I think still remain constructive on these names.